We’re watching the demise of oil as a weapon
The Iran war has pushed oil prices up, but nowhere near the oft-predicted triple-digit levels that could cause a global recession.
Since the Arab oil embargoes of the 1970s, the prospect of a major Middle East war has been the Voldemort of energy scenarios: Almost too terrifying to contemplate.
Since one-fifth of the world’s oil must pass through the Strait of Hormuz, abutting southern Iran, many strategists fretted that Iran could basically hold the world economy hostage by mining the strait and attacking tankers, sending oil prices soaring.
A 2019 study from the Center on Global Energy Policy at Columbia found that a war between the United States and Iran could push oil prices as high as $200 per barrel. Iran itself has warned that a war would push prices well above $100 and be “unbearable to America.” A year ago, Citi foresaw oil at $120 if hostilities broke out.
We now have the dreaded war with Iran, and oil prices are at … around $84 per barrel. That’s about $12 above pre-war levels, and high enough to cause ripples in financial markets. But it’s nowhere near the doomsday outcome war planners have feared for decades.
“If you were to have gone back a couple of years and said, what’s the mother of all disastrous scenarios for the global oil market? It would be the Strait of Hormuz. It would be bombs falling on Iran and in the Persian Gulf,” Daniel Sternoff of the Center on Global Energy Policy said on a March 3 podcast. “To be trading at only $80 a barrel is amazing. I have been really struck by that.”
Those forecasts of oil soaring above $100 weren’t wrong. They were predicated on a scenario in which Iran not only closed the Strait of Hormuz, but also destroyed energy infrastructure in major producing nations such as Saudi Arabia and Kuwait. Another longstanding assumption was that the United States would retaliate against those types of attacks by taking out much of Iran’s oil-production capability. Overall, that would take around 20% of the world’s oil off the market for a considerable period of time, which could easily produce stratospheric prices.
Most of that hasn’t happened. Iran has declared the 21-mile-wide Strait of Hormuz closed to tankers, but without taking any action to do so. US forces have sunk most of Iran’s navy and are steadily destroying much of the rest of its military. Iran has launched a few attacks against energy infrastructure in neighboring Gulf states, yet US and Israeli forces have refrained from attacking Iran’s energy facilities.
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The main reason oil prices have risen is that maritime insurers are withholding coverage for tankers passing through the strait, due to war. That’s a de facto blockade of the strait—but only temporarily. “Investors believe Iran has lost the war and that oil will be flowing through the Strait of Hormuz very soon,” economist Ed Yardeni of Yardeni Research wrote in a March 4 analysis.
Anything can happen in an unpredictable war and there could still be Iranian actions that hit oil markets. But Iran’s opportunities are rapidly diminishing as US and Israeli warplanes fly unimpeded over the country and pick off Iranian weaponry one-by-one. If Iran didn’t strike a decisive blow at the outset, it probably never will.
The de-weaponization of the Hormuz Strait caps a paradigm shift in global energy security that’s been underway for years. The fracking revolution has made the United States the world’s largest oil producer, not nearly as dependent on foreign oil as it was prior to 2010. Green energy is gradually displacing fossil fuels, even in the Middle East, where petrostates like Saudi Arabia recognize the importance of diversifying away from the oil economy. Russia’s invasion of Ukraine in 2022 led to sanctions that forced Europe and other nations to wean themselves off Russian oil and find other sources of energy.
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Other vulnerabilities, meanwhile, have emerged from the war. An Iranian drone attack on a huge natural gas facility in Qatar is causing more turmoil in that market than anything relating to oil. Qatar is the third largest exporter of natural gas, and a crucial supplier to many Asian countries, plus Europe. With Qatari supplies essentially shut down, gas prices in Asia and Europe have jumped by as much as 50% over pre-war levels. That doesn’t affect US prices much, because the United States has abundant natural gas and doesn’t rely much on imports.
Other possible targets in the region include data centers and desalination plants in Saudi Arabia, Qatar, Oman, Kuwait, and the United Arab Emirates. “This is not the Gulf of the last major conventional war that took place,” Mona Yacoubian of the think tank CSIS said on a March 4 videocast. “The target list goes far beyond what we typically think of, which is oil and gas infrastructure.”
That might sound harrowing to citizens of those countries. But if Iran can’t weaponize oil, the region’s longstanding bogeyman stands neutered and there could ultimately be one less reason to fight in one of the world’s perennial hotspots.